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Current GDP Level has Preceeded Past Recessions

by Doug Short, cross posted from Advisor Perspectives dshort.com

My monthly updates on GDP and its revisions feature column charts illustrating real GDP. These have the advantage of highlighting the patterns of change and the correlation between negative GDP and recessions.

Click on graphs for larger images.

Real GDP Per-Capita Growth

For a better understanding of the historical context, here is a chart of real GDP per-capita growth since 1960. For this analysis I’ve chained in current dollars for the inflation adjustment. The per-capita calculation is based on the mid-month population estimates by the Bureau of Economic Analysis, which date from 1959 (hence my 1960 starting date for this chart, even though quarterly GDP has is available since 1947). The population data series is available in the FRED series POPTHM. I used quarterly population averages for the per-capita divisor. Recessions are highlighted in gray. The logarithmic vertical axis ensures that the highlighted contractions have the same relative scale.

The real per-capita series gives us a better understanding of the depth and duration of GDP contractions. As we can see, since our 1960 starting point, the recession that began in December 2007 is associated with a deeper trough than previous contractions, which perhaps justifies its nickname as the Great Recession. In fact, at this point, 13 quarters beyond the 2007 GDP peak, real GDP per capita is as far off the all-time high as the trough that followed the Oil Embargo in 1974-1974.  We can also see that the recovery from the last recession has flattened out. In fact, since the interim peak in Q4 2010, real GDP per-capita has contracted for the past two quarters, -0.09% in Q1 and -0.02% in Q2.

Year-Over-Year (YoY) GDP Percent Change and Current Recession Risk

Economists vary widely in their opinions about the present-day recession risk. The official call on recessions, of course, is the domain of the National Bureau of Economic Analysis, which makes the determination on recession start and end dates several months — sometimes more than a year — after the fact.

The next chart shows the YoY change in real GDP from the earliest quarterly data in 1947. I’ve again highlighted recessions. The red dots show the YoY real GDP for the quarter in which the recession began. The blue dot shows the latest YoY real GDP. Note: Unlike the previous chart, this one does not include a per-capita adjustment.

As the chart illustrates, the latest YoY real GDP, at 1.5%, is below the level at the onset of all the recessions since the first quarterly GDP was calculated — with one exception: The six-month recession in 1980 started in a quarter with lower YoY GDP (1.4% versus today’s 1.5%). And only on one occasion (Q1 2007) has YoY GDP dropped below 1.5% without a recession starting in same quarter. In that case the recession began three quarters later in December 2007.

In his 2011 Jackson Hole speech, Chairman Bernanke observed that “growth in the second half looks likely to improve.” Our look at YoY GDP percent change suggests that we must indeed see stronger second half growth to avoid the recession that now appears to be a high-probability risk. If Q3 real GDP shows a continuation of the current trend, the NBER will likely pick a month in Q2 as the beginning of a new recession.

Related Articles

Analysis Blog articles by Doug Short

Analysis Blog articles on GDP

Obama Stimulus May Have Gotten It Right After All by Steven Hansen

It’s Time for a New Measure of Economic Growth by Martin Hutchinson

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